Rent control: The British experience and policy response

The private rented sector of the British housing market has been in decline since the beginning of the present century; that decline has continued apace since the end of the Second World War. A proposed solution for the stemming of this demise is the removal of present rent controls and the substitution of free market conditions so that rents find their own market levels. This, so it is argued, would enable landlords to obtain a proper return on their housing investments and lead therefore to an increase in supply and an ending to the present disinvestment from this housing sector.This article disputes this thesis. In the first place it is argued that “market rent” is a problematic concept and raises complex issues of distributive justice and social policy — which its advocates ignore. Secondly, it is argued that a free market solution is ahistorical in that it takes no account of the past failure in Britain of privately rented housing; and similarly it ignores the complex web of historical circumstances behind its decline — attributing the decline to the single causal factor of rent control. Thirdly, it is suggested that a market solution is sociologically misconceived because it ignores the characteristics and needs of those social groups dependent upon this sector. Finally, on grounds of practicability it is proposed that a free market in rented housing may be quite inappropriate for the rump of housing stock remaining in the private rented sector; and that, given the current social and economic constraints operating in the housing market as a whole, any revival of this sector is unlikely even with enhanced rental inducements.It is thus concluded that a free market solution is misconceived and would merely serve to impose an ideological straightjacket upon the provision of a basic human need.

Rent controls are probably the best researched and understood form of price control in economics. Their consequences are widely regarded as being extremely damaging and UK experience confirms this. In Britain, the period of rent controls between 1915 and 1989 was associated with the private rental sector collapsing from close to nine-tenths of the housing stock at the start of the 20th century to close to one-tenth by the late 1980s and early 1990s. When rents are held below market rates, outcomes can be expected to deteriorate over time. There is a substantial literature outlining the negative effects on the quality of rentable property, as well as substantial economic efficiency costs arising due to misallocation and lower labour mobility. Interest groups and politicians are now advocating what are known as ‘second generation’ rent controls, which entail rules governing increases in rents within a tenancy together with regulation of the length of tenancies. In the UK, the Labour Party has advocated such controls. Whilst there would be complete freedom for landlords to set rents between tenancies, rents within tenancies would be benchmarked so that increases are linked to average increases within a locality, some measure of inflation, or both during a three-year contract. Furthermore, tenants would have great security of tenure. Since rents can alter between tenancies, tenancy rent controls cannot improve affordability for any group other than in the very short term. It is most likely to simply change the timing of rent costs over a tenancy by raising initial rents. Indeed, the existence of these controls may even increase market rents overall as a result of greater regulatory uncertainty and the business risk of increased security of tenure raising the returns that landlords require. It is likely that these so-called tenancy rent controls will improve security for some tenants. However, this will come at a cost to other tenants. Experience suggests that landlords are more likely to treat tenants badly and lower their quality of service in other ways if security of tenure is enforced by law. Furthermore, there is no evidence that existing ‘secure’ contracts are unavailable in the UK when tenants are willing to pay for them. Some claim that these tenancy rent controls will not be damaging because they exist in Germany, where the market is regarded as a tenant-friendly environment. However, there are huge structural differences between Germany and the UK – not least that there is significantly more development of new dwellings in Germany, making rent levels much lower in general. Planning liberalisation would clearly be a welfare enhancing policy and would reduce the cost of living. Tenancy rent controls would not be welfare enhancing and are, if anything, likely to increase the cost of living. Tenancy rent controls would therefore be treating the symptoms of high rental costs to appease a particular interest group. The fact that the beneficiaries are obvious and well-organised whilst those who suffer are dispersed would make this is a potentially damaging policy, which could be very difficult to reverse.

Recent months have seen increasing public concern with the state of the housing stock in Britain. Symptoms of the malaise include physical decay, empty property, homelessness, geographical immobility of households, overcrowding, and large numbers of people in bed and breakfast accommodation. In the search for causes and cures, attention has been directed at the structure of tenures in the UK and in particular at the inefficient operation of the rented sector of the housing market. The UK is characterised by a relatively large municipally‐controlled rented sector, and a relatively small sector of private lettings, compared with many other advanced countries. Neither the public nor the private sector of the rented housing market seems at present capable of meeting the demand placed upon it. In particular, public policy over 70 years has systematically undermined the privately rented sector. From housing around 90 per cent of households in 1915, the sector has declined to a mere ten per cent in 1985. Two forces explain this extra‐ordinary collapse of private renting. Firstly, as more and more people have become taxpayers during the course of the 20th century, the advantages of receiving lightly taxed income ‘in kind’ by investing in owner‐occupied housing have become increasingly pronounced. Landlords pay tax on the income (including capital gains) derived from housing, owner‐occupiers do not. Secondly, some form of rent control or regulation has been in force for most privately‐rented property continuously since the early years of the First World War. The restriction of prices below market clearing levels in the private rented sector has inevitably discouraged supply, reduced repair and maintenance expenditures, hastened sales of hitherto rented property to owner‐occupiers, gravely impeded geographical mobility of households, distorted the allocation of available housing space, and exacerbated housing shortages (homelessness). As a long term component of social policy, rent control has almost nothing to commend it. Its predicted consequences can all be derived from the simplest application of microeconomic analysis, and many elementary textbooks use rent control as an outstanding example of the effects on markets of intervention in the process of price formation. However, in spite of the widely perceived disadvantages of rent control, it is a policy which it is very difficult to reverse. The purpose of this paper is to discuss briefly the main features of a scheme which was recently advocated by the present writer in a paper published by the Centre for Policy Studies.

Once, by giving long-term security of tenure and succession rights to those living in the private and public rented sectors, and ‘settled' accommodation to the homeless, housing law could be regarded as attempting 'to provide those who cannot afford to buy their own homes with a substitute for home ownership, a right to remain in occupation for at least a lifetime and often more' (Honoré, 1982: 37). Today, home ownership is itself far more problematic and far less secure than in previous decades. In the private rented sector, the Housing Act 1988 has drastically curtailed security of tenure and rights of succession to tenancies. Councils are being replaced by (quasi-private) housing associations as the main providers of social housing. The homelessness legislation has been judicially interpreted as imposing no duty to provide 'settled’ accommodation at all and the Housing Bill 1996 will take the process still further. A job for life is said to be a thing of the past. How many people now can reasonably expect to have a home for life? Key Words: housingsecure accommodationlocal authoritiesprivate landlordshomelessness

References

Recent housing tragedies and scandals such as Grenfell Tower fire, and the death of a child in Rochdale due to mould, cast a long shadow over the provision of housing and have brought several deficiencies of the private rented sector into the light. Security of tenure and rent control in particular have become significant political issues that framed the housing policies of the two major parties at the last general election. This paper examines the history of key legislative interventions in the regulation of this sector to divine lessons for the present. This is a history of pendulum swings between free markets and market failure, with unintended consequences resulting from poorly developed laws that emerged from political overreactions to problems in the private rented sector. The paper notes the relative success of policy compromises and cooperation with private landlords. The tragic history of landlord and tenant law also provides an unrivalled opportunity to test the assertion of R. H Tawney, that ‘freedom for the pike is death for the minnows.’

The private rental sector has been declining in many European countries. In describing the decline of the private rental sector, it is often suggested that a causal relationship exists between the decrease in private renting and rent control. The assumption is that the stricter the form of rent control, the greater the decrease in private renting levels. Or, conversely, that with fewer rent controls there are more opportunities for the private rental sector. At the same time, however, an unregulated rental market may result in insecurity for tenants. This text focuses on conflicts of interest between private landlords and tenants in the regulation of rents, from a welfare economics viewpoint. We present the results of a comparative study that involves France, England, Germany, Spain, Sweden and the Netherlands. We describe the system of rent regulation in each country. We conclude that the balance achieved between landlords and tenants as a result of rent regulation may not be as clear-cut as it is often presented to be.

Flaws and Ceilings: Price Controls and the Damage They Cause

PurposeThis paper aims to analyse the extent to which the government’s recent proposals to end no-fault evictions will result in “family-friendly” tenancies.Design/methodology/approachIt applies the theoretical scholarship on the meaning of family and home to the current law relating to private rented tenancies and the government’s proposals to increase security of tenure in the private rented sector.FindingsSecurity of tenure is important to a number of the key aspects of home. However, feelings of home are better protected by security of occupancy, which requires more than de jure security of tenure. For families to feel at home in the private rented sector, they must be permitted to personalise their home and to keep pets. Further legislative changes could achieve these changes. However, for families to really make a home in the private rented sector, they need to exercise some choice over where they live and for low-income families; this will only be possible with broader policy changes.Originality/valueThis paper contributes to the important scholarship on the meaning of home and applies this to the very current debate on the rights of tenants in the private rented sector.

The author takes a fresh look at the introduction of rent controls and their justification. She examines the tenants' need for ‘security of tenure’ and considers some of the undesirable social consequences which stem from tenancies ‘at will’. Alternative methods of granting security of tenure are examined to assess their economic consequences, and it is shown that these do not differ very significantly from those which rent controls produce. A general question is posed on the difference between an ‘individual contract’ approach to the legal difficulties of insuring security of tenure over time, as opposed to a statutory contract which covers whole groups in the population. The author makes a plea for bringing together the best of these two legal possibilities and criticises certain aspects of present British rent control machinery.

PurposeThe purpose of this paper is to analyze the effects of Swedish rent controls on observed vacancy rates for rental housing.Design/methodology/approachHousing vacancy rates are unevenly distributed among Swedish municipalities. In large expansive municipalities, such as Malmö, Göteborg and Stockholm, vacancy rates are very low, while in declining or smaller municipalities such as those in the northern and interior parts of Sweden, vacancy rates are considerably higher. This implies welfare losses not only in growing municipalities with queues for rental apartments but also in municipalities that are shrinking since the controlled rents there are higher than market rents and cause higher vacancy rates than with market rents. The authors estimate the influences of various determining factors, such as population growth, population size, rent levels, construction, demolition and market orientation of rents, on the observed vacancy rates.FindingsThe authors find that that these factors affect the vacancy rates differently depending on whether a municipality is large or small, growing or shrinking. Population growth, in percent per year, plays an important role in explaining the observed vacancy rates in declining regions.Research limitations/implicationsA research task that remains to be done is to calculate the welfare losses due to rent higher than the market rent for municipalities in contraction.Practical implicationsTo reduce the welfare losses of rent control, both in expanding and contracting municipalities, economists' straightforward recommendation to deregulate the rent control should, in principle, be carried out.Originality/valueIn many countries, rent control regulations are limited to cities, such as New York City. The paper shows that the Swedish rent control system however, applies nationwide, except for annual rent increases, which are set locally through negotiation.

Recent case law shows that vulnerable, previously disadvantaged private sector tenants are currently facing eviction orders – and consequential homelessness – on the basis that their leases have expired. In terms of the case law it is evident that once their leases have expired, these households do not have access to alternative accommodation. In terms of the Constitution, this group of marginalised tenants have a constitutional right of access to adequate housing and a right to occupy land with legally secure tenure. The purpose of this article is to critically analyse a number of legislative interventions, and specifically rent control, that were imposed in various jurisdictions in order to provide strengthened tenure protection for tenants. The rationale for this analysis is to determine whether the current South African landlordtenant regime is able to provide adequate tenure protection for vulnerable tenants and therefore in the process of transforming in line with the Constitution. The legal construction of rent control was adopted in pre-1994 South Africa, England and New York City to provide substantive tenure protection for tenants during housing shortages. These statutory interventions in the different private rental markets were justified on the basis that there was a general need to protect tenants against exploitation by landlords. However, the justification for the persistent imposition of rent control in New York City is different since it protects a minority group of financially weak tenants against homelessness. The English landlord-tenant regime highlights the importance of a well-structured social sector that can provide secure, long-term housing options for low-income households who are struggling to access the private rental sector. Additionally, the English rental housing framework shows that if the social sector is functioning as a "safety net" for low-income households, the private sector would be able to uphold deregulation. In light of these comparisons and the fact that the South African social sector is not functioning optimally yet, the question is whether the South African private sector is able to provide the required level of tenure protection for struggling tenants. Recent case law shows that tenants are at liberty to lodge unfair practice complaints with the Rental Housing Tribunals on the basis that the landlords' ground for termination of the lease constitutes an unfair practice. The Court defined an unfair practice as a practice that unreasonably prejudices the tenants' rights or interests. This judicial development signifies some transformation in the private sector since it allows the Tribunals to scrutinise landlords' reasons for termination of tenancies in light of tenants' personal and socioeconomic circumstances. The Tribunals are therefore empowered to weigh the interests of both parties and decide whether to confirm termination of the lease or set aside such termination. In light of this recent development, the Tribunals can provide strengthened tenure protection for destitute tenants on a case by case basis, which incorporates a flexible context-sensitive approach to the provision of secure housing rights in the landlord-tenant framework. This methodology is similar to the German approach. Even though this judicial development is welcomed, it raises some concerns with regard to landlords' property rights and specifically landlords' constitutional property rights since Tribunals are now at liberty to set aside contractually agreed grounds for termination of leases without any statutory guidance. The legislation fails to provide any information regarding legitimate grounds for termination, which might have to be rectified in future. The grounds listed in the rent control legislation should serve as a starting point to determine which grounds for termination of a lease should generally be upheld. However, German landlord-tenant law shows that a statutory ground for termination of a lease should not be imposed in an absolutist fashion but rather place a heavier burden on the tenant to prove why the lease should not come to an end.KEYWORDS: Constitution; landlord-tenant law; rent control; rent regulation; development of the common law; comparative law; housing law; statutory interpretation

This Working Paper studies ways to stimulate the private rental sector (PRS) of the housing market – and compares experiences with policies and reforms in Germany, the Netherlands, Finland and the Czech Republic. Although in many countries the PRS has decreased in importance since the Second World War, there are signs of a growing importance and possible 'revival' of the PRS. A well-functioning PRS and neutrality in housing policies can improve the functioning of the housing market – by promoting residential mobility, increasing housing options for households and generating competitive supply and affordable prices. The PRS can have positive effects on the economy and labour mobility and reduce inefficiencies and risks of owner-occupied and social housing. Trade-offs between goals in housing policies, and regulatory impediments to a level playing field between segments of the housing market (owner-occupancy, social rental, private rental) are analysed. The article outlines policy options in promoting a well-functioning PRS: lessons are drawn on tenancy security, rent-setting regulations, social housing, demand subsidies, fiscal measures for rental and owner-occupied housing and barriers for PRS supply. Experiences from the countries show that it is hard to create a level playing field – there are inefficiencies in all four countries. Nonetheless, there are many positive experiences of stimulating the PRS: reforms in Finland and the Czech Republic stimulated the PRS to become a competitive and important part of the housing market, and Dutch policies are adapted to stimulate a level playing field. The 'resilience' of the German housing system during the economic crisis shows that the large PRS and tenure neutrality have important stabilising effects on the German economy.

What stirs most people against rent control laws in the United States and elsewhere are stories of people who have held apartments for many years and now pay absurdly low rents for them. There are important reasons for removing rent controls, but the shock value of a low rent is not one of them. Basu and Emerson construct a model of second-generation rent control, describing a regime that does not permit rent increases for sitting tenants - or their eviction. When an apartment becomes vacant, however, the landlord is free to negotiate a new contract with a higher rent. They argue that this stylized system is a good (though polar) approximation of rent control regimes that exist in many cities in India, the United States, and elsewhere. Under such a regime, if inflation exists, landlords prefer to rent to tenants who plan to stay only a short time. The authors assume that there are different types of tenants (where type refers to the amount of time tenants stay in an apartment) and that landlords are unable to determine types before they rent to a tenant. Contracts contingent on departure date are forbidden, so a problem of adverse selection arises. Short stayers are harmed by rent control while long-term tenants benefit. In addition, the equilibrium is Pareto inefficient. Basu and Emerson show that when tenant types are determined endogenously (when a tenant decides how long to stay in one place based on market signals) in the presence of rent control, there may be multiple equilibria, with one equilibrium Pareto-dominated by another. In other words, many lifestyle choices are made based on conditions in the rental housing market. One thing rent control may do is decrease the mobility of the labor force, because tenants may choose to remain in a city where they occupy rent-controlled apartments rather than accept a higher-paying job in another city. Basu and Emerson show that abolishing the rent control regime can do two things: Shift the equilibrium to a better outcome and result in lower rents, across the board. A version of this paper - a product of the Office of the Senior Vice President and Chief Economist, Development Economics - was presented at an Applied Microeconomics Workshop at Cornell University.

CONTENTS I. Introduction II. Recent Developments III. The Takings Clause A. Fifth Amendment 1. Background Principles 2. Fractional Property B. Possessory Takings 1. General Rule 2. Rent Control C. Regulatory Takings 1. Economic Impact 2. Substantially Advancing Prong D. Unconstitutional Conditions 1. Discretionary Benefits and Relinquished Rights 2. Exactions 3. Individual Adjudicative Discretionary Actions E. Temporary vs Permanent Takings 1. Doctrinal Origins 2. Regulatory Delay IV. Due Process Clause A. The Theory of 1. Modern Standard for Confiscation 2. Particular Problems in Confiscation B. Preference for Takings Analysis V. Conclusion I. INTRODUCTION Housing is one of the necessities of life. (1) It also comprises a large share of most Americans' disposable income. Unlike other consumables, competition in supply and demand does not result in effective market restrictions on price. First, there is a limited supply of housing. The limit is both natural (there is a finite amount of land) and artificial (zoning restrictions limit housing supply). Second, consumers of rental housing do not have the same market power as do consumers of other goods. This is principally because substituting one product or brand for another, say at lease renewal time, exacts a high transaction cost--the considerable expense and inconvenience of relocating. Since rental housing is not fungible, each landlord is a demi-monopolist. (2) This is not meant as a pejorative, only to describe the owner's market power. The absence of a free market in rental housing (at least in an idealized sense) often leads to exploitation by housing providers. This is especially true in times of economic stress, when the nation's resources are devoted to more pressing needs (e.g., wartime), or during periods of high inflation and real estate speculation. It is during these times that government policy makers often consider restrictions on rent increases and other forms of tenant protection. (3) Of course, there are other means to overcome market inefficiencies in housing. Tax and cash subsidies can encourage housing production or assist with rent payments. Zoning incentives can do likewise. But federal and state governments are not as concerned with housing as they once were; the issue is currently perceived as one of local concern. As a result, municipalities are left holding the bag, so to speak, with a dwindling arsenal of regulatory means available to them in addressing housing shortages. Rent control is one of those still-remaining means. Rent controls were first enacted in the United States during World War I. Since then, the Supreme Court has considered the constitutionality of rent control at least a dozen times, upholding the challenged law on every occasion save one. (4) It is somewhat remarkable that even during periods of extraordinary judicial protection of property rights, rent control laws have nonetheless survived. This was true in the Lochner era, (5) as well as during the modern resurgence of property rights activism, at least at the Supreme Court. Despite long-standing judicial acceptance of rent regulation, the attack on rent control has been unrelenting. For some reason, rent control triggers greater emotional and ideological opposition than do most other forms of economic regulation. Virtually every constitutional theory has been tried. Most challenges are based on the takings and due process clauses, but the contracts clause (6) and even the first (7) and thirteenth amendments (8) and equal protection (9) have made their way into the opinions. Creative statutory claims have also been mounted, such as the argument that rent control is an illegal form of price fixing. …